Reserve Bank of Australia Leaves Rates Unchanged as Expected

The Australian Dollar rose by almost a percentage point following a meeting of the Reserve Bank of Australia. The AUD rose to a weekly high of 0.782 after the RBA left interest rates unchanged. The rise was also attributed to a weaker dollar after the European Union released a list of products they would target if Trump passes the tariffs on aluminum and steel.

After the two-day meeting, the RBA left interest rates unchanged at 1.5%. This was an expected move. A survey done by Bloomberg before the meeting found that 80% of the economists surveyed expected the bank to leave rates unchanged. This marked the 19th consecutive month of no rate hikes.

The Australian economy has continued to struggle as the country tries to diversify its revenues from mining.

Last month, data from the Australian Bureau of Statistics (ABS) showed that the country’s unemployment rate stood at 5.6%. It has held this percentage for a few months now. At the same time, the wages have struggled to grow. In the latest report, the country reported that wages grew by less than 3%.

At the same time, the RBA is struggling with a low inflation rate. In the recently released report, the country reported a QoQ inflation rate of 0.4%, which is below the target of 2.0%.

In yesterday’s statement, the RBA signaled that a rate hike might not be in sight. In the statement, they said:

“Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”

In other words, in the statement, they provided a forward guidance about inflation and potential rate hikes for the first time.

Another divergent view from the RBA was about the country’s GDP growth. In the previous meeting, they said that the country’s GDP would grow from 2.5% to 3%. In this meeting, they changed the language, saying that the economy would ‘grow faster in 2018 than it did in 2017’.

This statement came a day before the country released the GDP numbers. In the numbers, traders expect that the country’s GDP expanded by 0.5% in the last quarter with an annualized rate of 2.5%.

A stronger economy, with a robust job environment, booming housing markets, and a growing retail environment will lead the RBA to start the normalization process. In the current situation, with inflation rate so low, and with the wages growth still lagging, and with the economy slowing down, the probability for a rate hike is so low.

Central Banks in the developed countries are now starting to talk about normalization following years of easy money. This process has already started in the United States. The ECB has indicated that it could start normalization in September while Bank of Japan has signaled that they will start in April next year. On the other hand, Bank of England has already started normalization following months of increased inflation.